Builders are stepping up home construction broadly across the U.S., suggesting the housing market will help anchor the economy amid global turbulence and a likely rise in interest rates.
Builders broke ground on 1.173 million units, when calculated at a yearly rate, in November, up 10.5% from a month earlier, the Commerce Department said Wednesday. Construction climbed at roughly the same pace in the first 11 months of the year compared with the same period in 2014
In a key development, construction is picking up not just in apartments but in single-family homes, too. Starts in the latter category—reflecting two-thirds of the market—reached a nearly eight-year high in November.
The across-the-board gains suggest builders are gaining confidence that home sales will remain steady, if not robust, over the next year despite the likelihood that the Federal Reserve will raise interest rates at its policy meeting Wednesday. Mortgage rates could eventually rise as a result but are expected to remain at historically low levels for a while.
“There is a great deal of pent-up demand for housing,” PNC senior economist Gus Faucher said in a note to clients. “With steady job growth of around 200,000 per month, a falling unemployment rate, rising wages, very low mortgage rates, rising household formations, and better access to credit, demand for new homes is steadily improving.”
A sustained pickup in home construction would help boost the economy by creating construction jobs and demand for a host of goods, from wood paneling to sofas.
Wednesday’s report offered several encouraging signs on that front. Building permits—a bellwether for construction in coming months—climbed 11% in November from October to an annual pace of 1.289 million. They are up 13.4% this year compared with last.
Despite the latest momentum, home construction is hardly on a tear—it remains less than half of its 2006 peak. And building of multifamily units—apartments condominiums—continues to rise more quickly than single-family homes, suggesting many Americans remain constrained in their ability to borrow.
The market continues to face obstacles. Builders have reported shortages of land and labor, leading to delays in projects’ completion. Those delays often serve to push prices up, so the builder can recoup costs.
While the market overall remains fairly strong, builders say the market has cooled in some areas of the country, largely because of the drop in oil prices and affordability concerns.
John Burns, who runs a builder consulting firm in Irvine, Calif., said that last month 19% of builders dropped prices when taking incentives into account. That partly reflects a seasonal slowdown, but also likely shows buyers are growing weary of the high price of buying a new home.
“The home builders have pushed their prices faster than the resale market and it’s catching up with them,” he said.
Susan Maklari, an analyst at UBS Investment Bank, said the Houston market has dropped off because of lower oil prices, while in the other big Texas markets, Dallas and Austin, buyers have pulled back because the steep price run-ups in recent years were no longer sustainable.
“The whole state of Texas has had huge price appreciation,” she said. “Buyers are saying this is just getting to a point where it’s just not sustainable.”
Earlier this month, luxury home builder Toll Brothers Inc. posted weaker-than-expected profit for its fourth quarter, underscoring that the market is continuing to recover more sluggishly than analysts hoped. Still, the company said new-home orders are up 21% in the first five weeks of its fiscal year 2016, compared with the same period last year.
Douglas Yearley, the company’s chief executive, said the company has continued to see strong demand in California and Dallas and a number of other markets. But, he added, “Houston is slower, no question about it.”
Analysts expect the recovery next year to remain modest. Mr. Burns said a survey of more than 200 home builder executives found that they expected only 6% more lots to be developed next year compared with this year.
But in other parts of the country, builders say they are planning to ramp up construction in preparation for the spring selling season. Mark Ward, chief marketing officer at Raleigh, N.C.-based Shenandoah Homes, said he expects new construction in the North Carolina area to be strong. Currently, he said, they have about 2.5 months’ supply of new homes, when closer to six months is normal.